People Didn’t Need the Internet in 1993. Do They Need Blockchain Now?

Singularity University Canada Summit in Toronto kicks off with a massive event at Evergreen Brickworks, and I get to learn more about bitcoin and blockchain.

A conversation with Andreas M. Antonopoulos, author of Mastering Bitcoin and The Internet of Money, one of the world’s leading experts on bitcoin and blockchain.

I met Andreas M. Antonopoulos at the inaugural edition of Singularity University Canada Summit in Toronto earlier this fall, where he was breaking down bitcoin/blockchain for a large crowd of business leaders, entrepreneurs and thinkers at Evergreen Brickworks, a former quarry and industrial site reserved for the event. The flurry of emerging conversations around bitcoin and blockchain, the billion-dollar valuations, and the specialized jargon can make blockchain an intimidating topic to wade through. Is the hype justified? Consider:

Bitcoin (BTC) went over $6,200 this week, as the total crypto market cap approached $180 billion.

Since then, it’s risen past $7,300, and more recently, hit the new high at $11,377. In the following interview, Antonopoulos discusses some of the basic definitions and terms of art, why bitcoin/blockchain won’t be stopped, and why Canadians don’t feel they need bitcoin just yet.

What is your operating definition for blockchain and bitcoin?

Bitcoin is digital currency and payment network introduced in 2009; it is an internet-based system of money. Blockchain is one of the foundational technologies that was developed by the inventor of bitcoin. Blockchain is bitcoin’s ledger that records all the transactions that have ever happened in the database distributed around the world. Since the invention of bitcoin there have been thousands of systems built using blockchain and similar systems.

Why are you excited about bitcoin and blockchain?

These new systems have created a way to have a trusted transaction between two people who don’t trust each other without the need to involve a trusted third-party. Previously, two people who can’t trust each other could only transact through a trusted third-party, like a bank, or use government-supported methods of transaction like cash, etc. Bitcoin allows people to transact without trusting each other and/or trusting third-party.

For the first time, you can have a global currency that is not created by any government, not controlled by any government, does not require banks and is not controlled by banks. It is a network protocol that runs on the internet. From a practical perspective, this means that using bitcoin, anyone can send payments anywhere in the world to anyone, quickly and securely, without the approval of anyone, simply by downloading an internet application, and everyone can participate in the system — it’s open, you don’t need an ID, don’t need to be documented, approved by anyone. It’s a bit like if you could email cash or gold across the world.

Some have compared bitcoin with gold. Does gold have any advantages over bitcoin?

The only advantage gold has is that it is more broadly accepted, because people understand the value of gold more broadly. It’s been around long enough that people trust the value of gold. With bitcoin, that level of trust is still developing.

Is it possible for governments to screen and censor bitcoin internet traffic and if yes how can the bitcoin network overcome this?

It’s not possible for government to screen or censor bitcoin traffic. Those transactions are simply information, and as long as there’s a way to get information from point A to point B, bitcoin will continue being transacted. Even the most sophisticated and totalitarian technologies leak; people get content through firewalls now, and so there’s not a way to stop bitcoin transactions without stopping all communication. Bitcoin can be transmitted by radio, smoke signals, colours in a picture; any mechanism by which you can encode information you can use to encode bitcoin transactions, so there’s no way to stop it.

Bitcoin can be transmitted by radio, smoke signals, colours in a picture; any mechanism by which you can encode information you can use to encode bitcoin transactions, so there’s no way to stop it.

Let’s talk about some current jargon thrown around like proof of stake and proof of work — two approaches to the core encoding of information on the blockchain. What are some of the advantages and disadvantages of proof of stake over proof of work?

Proof of stake and proof of work are consensus algorithms, i.e. a way to encode information on the blockchain without giving anyone control over blockchain; a way to achieve distributed consensus. Here’s how validating information on the blockchain works right now: There’s an open mining competition that runs every 10 minutes, to add a new block to the blockchain. In order to participate, you’d have to expend electricity, and that mechanism is called proof of work. Since the introduction of the proof of work, many people have been working on other developments in the space. Consensus of algorithms have become a discipline of computer science; some of the concepts proposed include proof of stake and others.

Proof of stake means that instead of expending energy in order to commit to the security of the network, those wanting to participate have to commit funds in the currency of blockchain. You have to commit dash to participate in dash, and you risk the dash you commit on the promise you’ll commit to the security rules. If you follow the rules, you get rewarded, and if you break them, you lose what you have staked. It’s simply an application of market economics to a distributed system, a way of creating trust in the distributed systems, by using market forces, like competition, cooperation, risk/reward.

Proof of work is extremely resistant to attack and very robust, because it requires vast amounts of energy, which discourages people from cheating; the cost is very high and it’s not easy to source enough energy to compete in the system. Proof of work delivers a stronger guarantee of immutability, another core concept that’s important to understand: Once something is recorded on the ledger, it cannot be changed. The downside, of course is that it costs a lot of energy, so lots of money is currently being used to secure (the) bitcoin network.

Advantage of proof of stake? No energy is used, but the immutability promise — meaning it’s extremely hard if not impossible to modify the data once it’s part of the ledger — is much weaker, so that has led to significant disagreement in the industry, and that’s not settled.

All those consensus algorithms have to prove their validity by being tested on the global scale with significant money behind them.

While Satoshi Nakamoto has been credited with inventing Bitcoin, today’s Bitcoin software is being maintained by an active group of developers, and that group is growing. Is the group of bitcoin maintainers one of the advantages or valuable properties of bitcoin? How will any changes to this group affect the value of bitcoin?

It’s important to not confuse various participants in the system. If by “bitcoin maintainers” we mean the development team that works on bitcoin then yes, it is one of its strengths. It is a large and diverse, extremely skilled group of people. They’re producing not only very high-quality secure code, but also a lot of innovation in cryptography, networking, and other computer science disciplines. The developers of bitcoin have produced a system that is very well tested — there’s a testing infrastructure around bitcoin software that tests every aspect of every library thoroughly, and they have discovered two previously unidentified bugs in SSL library, a piece of software that’s being used in millions of websites and projects around the world. Apparently, for years, there were these undiscovered bugs. Bitcoin doesn’t use that library anymore, but the fact they have discovered the bugs shows the quality of the work that’s being done. The makeup of that group changes all the time: it’s about 400 people now, and they are constantly changing. Robust and healthy community around the project absolutely affects the software and the value of the currency. So far, more and more really smart people are attracted to this project and the project is growing — the level of activity, quality of the code, number of participants — all those metrics are growing rapidly.

Programmable blockchains like Ethereum deal with digital assets that smart or self-executing contracts can directly manipulate, since whatever parties making a transaction agree to is being written into the code itself. Do you see a way to connect physical assets to blockchains? How do you propose to reconcile the resulting trustfulness with the trustless paradigm of blockchain?

Connecting physical assets to blockchains is tricky. It is an unsolved problem. The advantage of operating with purely digital assets — you don’t need a third party and you don’t carry third-party risk. There’s a counter-party risk, meaning that someone might be hiding an asset somewhere, and that introduces a constant risk that whoever holds that asset may not produce the asset. So you introduce the counterpart risk of custodians, like courts, governments, etc. In this context, a lot of advantages of blockchain are lost. Blockchain solved this problem for digital assets right now, but all other ways of transacting still require a trusted third party.

Trustless as a term is confusing to people; often, people think it means you can’t trust. The concept is better explained if you think of two people who can’t trust each other, who can transact without involving the third party. You trust the rules of consensus and the ability of the network to resist attack. You’re trusting in the bitcoin software you’re running, and in the network to operate correctly. You’re trusting the protocol, but you’re not trusting other parties; you’re trusting mathematical rules and verifiable code, over authorities, hierarchies, and people. That’s the fundamental shift that blockchain brings.

In a very simple way: It’s important to recognize that existing financial systems — banks, payment networks — have a built-in imbalance. As long as you are transacting in one of the top 10 national currencies and a country that has a functioning democracy and functioning bank oversight, where the banks are not organized crime syndicates, then great, you can trust these institutions and the current system works. But you can only make that statement in about 5–10% of the world. It applies to maybe about a billion and a half people. Where does that leave the other 6 billion, all these countries where you can’t trust the rule of law, government, and banks because they’re criminals? In such systems, having a neutral currency, a mathematical system that you can trust allows you to have economic activity.

Simply put, if you don’t have the advantage of trusting other systems in place to make sure your savings aren’t stolen by your government or a bank, you can’t easily do commerce; there are no institutions stable enough to support it. When you introduce those currencies that are neutral and can be trusted, individuals can gain power, security and justice, which will allow them to engage in commerce. Billions of people fall into that category. It’s difficult to see that when you are a fully documented citizen of the majority religion/race protected under modern democracy and living in a country with functional banks, where most of the people can play and transact. If everyone in the world was like Canada we wouldn’t need this technology.

A lot of people in the space — people from Ukraine, Argentina, Brazil, Venezuela, Colombia, Greece — know that stability is not the norm. Knowing you have the rule of law on your side, and that your bank won’t simply take your money from you one day, that your government won’t collapse overnight — there are many countries where people don’t have that. Canada and the US is not the norm. It’s a tiny exception.

People ask me, why do Canadians need bitcoin? They don’t. They don’t yet. If democratic institutions around them start collapsing, they will. Things aren’t looking good in the US right now. Doesn’t mean it’s not useful — we should not be designing technologies based on the needs of the most privileged five percent of the human population. But this technology is extremely empowering for the rest of humanity.

Would you say bitcoin/blockchain protocols enable a new class of transactions, like machine to machine payments, which cannot depend on anyone’s credit card suddenly being blocked by a bank? Things like self-driving cars and the internet of things, and the payments system machines will need to function. What kind of potential applications do you see in that space?

Eventually, yes, you’ll see a lot of applications that simply cannot be done with the existing payments tech, and at that point, bitcoin/blockchain will become extremely interesting in the existing developed world, but it’ll take time for the technology to mature. At the beginning, when internet has emerged, who needed it? It was of niche interest to academics, physicists, researchers, military and government, and of no relevance to regular people. We simply didn’t need the internet in the early days. It took a long time for the internet to mature. Now you see countries that view connectivity to the global internet as an essential to life and a human right.

With bitcoin and blockchain, we’re in the same place the internet was in 1990 or 1993. The real serious “killer” app — inflection point — hasn’t been reached. We’re in the email phase, and we don’t have the web yet. Everyone needs to have gone through building that basic capability phase first, so now it’s just currency, just payments. Money is the first app, and there will be many more apps on top of that, but the basic capability of money needs to be widely deployed and available first. Just like you couldn’t do Facebook in the 1990s, you can’t build some of the most interesting applications on the population that’s small and dispersed. Once a lot of people have wallets, say 1 out of 5, then we can start talking about building more sophisticated applications. Even basic retail is hard; unless you’re in Palo Alto, nobody will care. Nobody will engage with you. So what if you’re accepting bitcoin? You’ll be standing alone.

In Canada, we are seeing huge interest and activity around cryptocurrency; the founder of Ethereum is from Toronto, we have companies here experimenting with blockchain/bitcoin, building bitcoin ATMs, and applications. Could you share some thoughts on why Canada seems such a hotbed of innovation in the crypto space right now, and what can we do to keep it this way?

Canada is exploding with action — not in terms of adoption — but in Canada, it’s the startups, the entrepreneurial activity, innovation, research. I think the reason is obvious. Canada’s neighbour to the south is in dire straights in so many ways, and the regulatory climate that differs from state to state, money services and transmission are complicated. It is difficult to operate in the US right now.

In Canada, the government took an approach of wait-and-see, so our regulatory measures are conducive to innovation. I have testified in front of the Senate of Canada in 2015, and I recommended to wait and see, and the committee has adopted that. This approach has allowed a lot of Canadian companies to experiment, develop, grow and build operations, and attract talent from other countries. Literacy, education, academic institutions, health care, a moderate government, along with a multicultural inclusive society, — all those great things Canada has work to its advantage. In Europe, we have the same problem that we see in the US, namely market fragmentation, regulations of cryptocurrency segmented by countries, and the regulatory climate that is hostile, with the execution of Switzerland, and that’s why Canada has thrived.

The bottom line: with disruptive, grassroots technologies like this, government can’t really help, but they can do damage. So the best thing government can do is to stay away and let it be; do the least amount of damage possible. It doesn’t need government approval, endorsement or support. It just needs government to leave it alone. If government gets involved, they just push the activity elsewhere, like Switzerland, Singapore and yes countries like Canada, who are there right now, with open arms.

I think it’s an exciting technology and as disruptive as the internet has been. It’ll have a huge impact around the world. This will start being obvious a decade from now, maybe two. Governments are failing or succeeding because of the internet. History is changing because of the internet. We have seen it coming, but it has been dismissed as fanciful thinking.

Most people think bitcoin and blockchain are silly fads, too, and they dismiss it, but I’m pretty confident. Cryptocurrencies will change the course of history.

For the uninitiated, Antonopoulos’ Mastering Bitcoin is an excellent place to start understanding these new technologies. The book is widely considered a seminal work that helped shape people’s understanding of the possibilities blockchain and bitcoin represent. Thankfully, Antonopoulos is prolific online and has an excellent YouTube channel: https://www.youtube.com/user/aantonop and if we’re lucky, maybe we’ll see him consulting / playing a part on Mr. Robot one day.